Australia’s treasurer has announced the biggest shake-up of the country’s central bank in its 63-year history, proposing the establishment of a new interest rate-setting board and an overhaul of its culture.
The reforms were unveiled after a review of the Reserve Bank of Australia, the first in four decades, was launched last year following sharp criticism of its handling of interest rate guidance and slow response to rising inflation.
Philip Lowe, RBA governor, had indicated in 2020 that the central bank did not expect to raise rates until 2024 before it did so for 10 consecutive months starting in May, pausing only last month.
The about-face left thousands of mortgage holders with sharply rising payments after rates jumped from 0.1 per cent to 3.6 per cent in a year and prompted Lowe to apologise for a lack of clarity in his forward guidance.
The review, initiated by the Labor government that was elected shortly after the first rate rise, found that the RBA had played a critical role in Australia’s economic strength over the past three decades, when the country’s resilience to financial shocks deterred reform of the central bank.
But the review also criticised the bank’s communication and structure, portraying a hierarchical culture of deference to senior staff, as exemplified by its response to the coronavirus pandemic.
Jim Chalmers, Australia’s treasurer, said his government had accepted in principle all the recommendations of the review, including a move to divide the bank’s board that would allow a panel of experts to set monetary policy. This would replicate structures adopted by the UK and Canadian central banks, separating interest rates from their broader activities.
Chalmers said the recommendations would be implemented by July next year and bring the RBA up to global best practices. “This is more important than ever given the complex economic environment we face,” he said.
Isaac Gross, an economics lecturer at Monash University, said splitting the board would break a “cosy arrangement” whereby non-experts sitting on the RBA panel deferred to the advice of the governor and other senior bank staff.
“There’s no one to hold them accountable,” he said, pointing to sections of the review that suggested the board was often not given alternative options to debate when voting on policy.
Chalmers said the interests of Australia’s workers would be represented on the board as monetary policy narrowed to focus on “full” employment and inflation, but he added the shake-up was not ideological in nature and would require bipartisan support.
He also moved to strengthen the independence of the central bank by removing the government’s right to veto its decisions.
Lowe, speaking at a press conference on Thursday, said the RBA had “learned some lessons about how to communicate” after the pandemic and broadly welcomed the proposals of the review.
The governor, whose term ends in September, said he would continue in the role if asked to by the government, which is expected to make a decision around June.
Lowe pushed back on some of the review’s findings, such as those concerning how the current board’s structure worked, which he said were “not quite lined up with the reality that I know”.
His comments suggested there was a risk that the proposals might not be fully implemented, analysts warned. “You can only force the RBA to do so much if they’re not on board,” Gross said.
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